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Follow up to Question on: Tax Reform And How It Affects Real Estate

 

The Following is from Ed Irwin a Broker here at The Cascade Team:

Nice summary. One question for you: the way the article is written (and, who knows, perhaps the law itself) it states While homeowners could, up until now, deduct interest on a home loan of up to $1 million, that cap will be lowered to $750,000 come 2018. Now if you have an existing mortgage, you don't need to worry about this change, but if you're applying for a new home loan in 2018, you should know about the impending cap.

 

It states the homeowners can deduct interest on a home loan of up to $750k. 

 

What if a person gets a new mortgage of $800k. Does that mean that interest on that loan is not deductible at all, or is 75/80ths of that interest deductible? 

 

I have no idea how the law is drafted, but either interpretation might be construed to be the correct one according to the wording. I would assume the second one would be correct Have you any idea of clarification on this?

 

Hi Ed,

 

It really has nothing to do with the amount of the loan… Just the interest…. Typically on a $500,000 home over 30 years see the example below: The interest on this is $385,491.80… All of that is deductible.

The same is true for a $750,000 loan… The interest is only $578,237.71 All deductible...

Even on a $1,000,000 loan as shown in example 3 the interest is just 770,983.61 of which $750,000 would be deductible!

Plus this interest deduction restarts every time you buy a new home…. So you could buy a $1,000,000 home live there for 10 years and be able to deduct ALL of the interest you pay which would equal $345,743.65... Then sell and keep $500,000 (Married) profit tax free AND then when you buy a new home the interest deduction would start all over!

Loan Summary 1

Principal

Interest Rate

Length

Amortization Schedule

Change Parameters

$500,000

4.25%

30 years

ViewPrint

Change Parameters

Payment Summary

Number of Payments

Monthly Payment

Total Principal Paid

Total Interest Paid

Total Paid

360

$2,459.70

$500,000.00

$385,491.80

$885,491.80

 

Loan Summary 2

Principal

Interest Rate

Length

Amortization Schedule

Change Parameters

$750,000

4.25%

30 years

ViewPrint

Change Parameters

 

Payment Summary

Number of Payments

Monthly Payment

Total Principal Paid

Total Interest Paid

Total Paid

360

$3,689.55

$750,000.00

$578,237.71

$1,328,237.71

 

Loan Summary 3

Principal

Interest Rate

Length

Amortization Schedule

Change Parameters

$1,000,000

4.25%

30 years

ViewPrint

Change Parameters

 

Payment Summary

Number of Payments

Monthly Payment

Total Principal Paid

Total Interest Paid

Total Paid

360

$4,919.40

$1,000,000.00

$770,983.61

$1,770,983.61

 

$1,000,000 First 10 years:

Payment Summary

Number of Payments

Monthly Payment

Total Principal Paid

Total Interest Paid

Total Paid

360

$4,919.40

$1,000,000.00

$770,983.61

$1,770,983.61

Yearly Amortization Schedule

Payments

Yearly Total

Principal Paid

Interest Paid

Balance

Year 1 (1-12)

$59,032.79

$16,858.66

$42,174.12

$983,141.34

Year 2 (13-24)

$59,032.79

$17,589.28

$41,443.51

$965,552.06

Year 3 (25-36)

$59,032.79

$18,351.56

$40,681.23

$947,200.50

Year 4 (37-48)

$59,032.79

$19,146.87

$39,885.91

$928,053.62

Year 5 (49-60)

$59,032.79

$19,976.66

$39,056.13

$908,076.97

Year 6 (61-72)

$59,032.79

$20,842.40

$38,190.39

$887,234.57

Year 7 (73-84)

$59,032.79

$21,745.66

$37,287.13

$865,488.91

Year 8 (85-96)

$59,032.79

$22,688.07

$36,344.72

$842,800.84

Year 9 (97-108)

$59,032.79

$23,671.32

$35,361.47

$819,129.52

Year 10 (109-120)

$59,032.79

$24,697.18

$34,335.61

$794,432.34

Interest would total: 345.743.65 after 10 years on a $1 Million Loan…. ALL of that would be deductible…

Then is they sold their home… A Married couple could still make $500,000 Capital Gains and pay no interest on that $500,000 AND then when they buy a new home the interest deduction would start ALL OVER for the new home and they could write off another $750,000!..... So this is really going to have VERY LITTLE effect on buying and selling homes at all for us!

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